Trump administration wants to overhaul the way you repay student loans

Jun 1, 2017

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The Trump administration put its largest stamp on the student loan system yet with a plan to overhaul the way borrowers repay their debts that critics say discards important borrower protections pushed by the Obama administration.

Under the new plan released Friday, one company will manage the federal student loan repayment process. Right now, borrowers with federal student loans pay their debts back to one of many servicers hired by the Department of Education through a lucrative contract. Trump administration officials used the latest step in the solicitation process for that contract to announce their intentions to revamp the program.

Betsy DeVos, the Secretary of Education, framed the new system as a necessary improvement over both the current system and the Obama administration’s own 2016 proposal to overhaul student loan servicing that would protect borrowers and save taxpayers money. “The existing student-loan servicing requirements, put in place by the Obama administration, created a chaotic system that has resulted in numerous consumer complaints,” DeVos wrote in a Wall Street Journal op-ed published Friday.

But borrower advocates are concerned the new system proposed by DeVos’s Department of Education puts borrowers at risk and rolls back progress in achieving consumer protections. Throughout the last year of the Obama administration, officials proposed revamping the student loan servicing system by creating a contract that would require servicers to work closely with borrowers at risk of default and send borrowers literature developed by the Consumer Financial Protection and Department of Education that informed borrowers of their rights, among other provisions.

Those, and other requirements, are missing from the updated solicitation published by the DeVos administration Friday, which is troubling, said Colleen Campbell, the associate director of postsecondary education at the Center for American Progress, a left-leaning think tank. Borrower advocates have complained for years that student loan servicers don’t provide borrowers with enough or the right information to help them manage their debts. They say that’s part of the reason why more than 1 million federal student loan borrowers defaulted on their loans last year, despite a myriad of repayment programs offered by the government that borrowers can use to manage their debt.

“We wanted more explicit standards for federal student loan servicers,” and the Obama administration’s proposal, “addressed a lot of those issues,” Campbell said. “What we see in this document is that a lot of those things that seemed like common sense reforms are being rolled back.”

Manning also defended DeVos’s decision to rescind two Obama-era memos that directed officials to consider a servicer’s past poor performance into account when awarding servicing contracts and reward companies that effectively help high-risk borrowers and others stay on track toward repaying their loans.

The Obama administration’s instructions were overly prescriptive and would have cost the government too much money, according to current Department officials. The Trump administration expects the new servicer system will save the government more than $130 million in the first five years, DeVos wrote in the op-ed.

Borrower advocates had derided DeVos’s decision to rescind the Obama-era guidance, arguing that without those instructions there is little to incentivize servicers to work in borrowers’ best interest. “While we don’t want to be too prescriptive in terms of how servicers do their jobs, I think it’s important to set a minimum baseline standard for how servicers work with borrowers,” Campbell said.

The Trump administration’s proposal does retain one major element of the Obama-era initiative — the eventual launch of a single portal borrowers can use to repay their debts. Right now, borrowers receive different communications and send their payments to different places, depending on their servicer. With the single platform, the hope is that the repayment process is more consistent for borrowers.

The overhaul proposed by the Obama administration would have put one company in charge of creating the new platform, but allowed other firms to actually service the loans. The Trump administration’s vision requires that only one company be in charge of both tasks, though that primary firm could subcontract some of the business to other companies.

Putting one company in charge of the entire student loan repayment system could raise too-big-to-fail alarms, critics say, particularly given that some of the firms competing for the contract have been accused by state and federal regulators of mistreating borrowers.

“The approach may raise concerns that the Education Department will be overly reliant on a single student loan company,” Rohit Chopra, a senior fellow at the Consumer Federation of America, a coalition of nonprofit consumer organizations. “The changes will certainly increase profits for the industry, but will do nothing to tame the high levels of default in the program,” added Chopra, who is also the former student loan ombudsman at the CFPB.

Manning defended the decision to work with one company, noting that it makes it easier for the government to monitor performance. “We’re confident that with the final decision we’ll have someone who steps up and can perform,” he said. “We can better monitor the performance of one servicer and one platform.”

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